Hi. I’ve read a number of bank sights about their retirement packages. However, are there any unbiased resources out there that explain what a traditional IRA offers and what a Roth IRA offers? Any websites out there? Any pointers?

6 comments so far...

jimdotedu Said on January 11th, 2010 at 6:02 pm:

Roth, you pay tax up front and your money grows tax free.

Traditional, you put in tax free money, and it gets taxed when you withdraw it.

ed m Said on January 11th, 2010 at 6:28 pm:

how the money has been treated for tax purposes

ira pre tax

roth after tax!!!

Wayne Z Said on January 11th, 2010 at 6:53 pm:

Traditional – For 2007, you can put up to $4000 in a traditional IRA and, if you qualify, get a tax deduction. If you are in the 25% bracket, this saves you $1000 in federal taxes. When you retire, you take the money out, generally a little at a time, and pay taxes then.

Roth – The same $4000 limit applies for 2007 but there is no tax dedution. When you take the money out (including the earnings) when you retire, it is not taxed at all.

If you are young, conventional wisdom says you should choose the Roth IRA. The taxes saved on the back-end will greatly outweigh the taxes paid on the front-end.

One caveat thought. No one knows what a congress in the future will do. They may decide to tax the earnings from Roth IRAs for certain people. Who knows?

StephenWeinstein Said on January 11th, 2010 at 7:49 pm:

1. If your income is below a certain amount, you can deduct traditional IRA contributions but cannot deduct Roth IRA contributions. This may make the traditional better, or the Roth may be better for reason 2 below. If it is between that amount and another (much larger amount), you can contribute to either, but cannot deduct contributions to either. In that situation, the Roth is better for reason 2 below. If it is above the much larger amount (well over $100,000), you cannot contribute to a Roth but can contribute to a traditional, but cannot take a deduction, and should be paying someone to answer these questions for you.

2. Withdrawals of earnings from a traditional IRA are always taxed. If you deducted the contributions, then all withdrawals from the traditional IRA are taxed. Also, before age 59 1/2, there is a 10% penalty on most traditional IRA withdrawals. Roth IRA contributions can be withdrawn at any time, without tax or penalty. After age 59 1/2 and in certain other circumstances, Roth IRA earnings can also be withdrawn without tax or penalty.

Example:
You have $1000. If you do not invest it in an IRA, you will owe $500 in taxes. Your income is low enough that you can deduct all your traditional IRA contributions. The total of your federal and state income tax brackets is 20% and will be for the rest of your life.
The money will double in the time that it is in the acount. You will be 61 when you withdraw it.
Option 1: Use $500 to pay your taxes and put the other $500 in a Roth IRA. When you are 61, you wil have $1000 ($500 times two) in the Roth account, and will withdraw it without paying taxes or penalties.
Option 2: Put $625 in a traditional IRA. This lowers your tax by $125 (20% of $625), so you only owe $375 in taxes. Pay this with the $375 that you have left after putting the $625 in the traditional IRA. When you are 61, the IRA will have $1250 ($625 times 2), which you will withdraw. This will increase your taxes for that year by $250 (20% of $1250), which you will pay with $250 of the $1250 that you withdrew, leaving you with $1000.

In this particular case, the options had the same result. If your tax bracket goes up or down or you need the money before you are 59 1/2, one is better than the other.